Can a marriage of AOL and Yahoo save the fading Web titans?

Word on the street is that AOL and Yahoo are exploring a merger or acquisition …

According to Bloomberg and its ubiquitous "people familiar with the matter," AOL might be jonesing for a merger with boss-less 'net titan Yahoo.

The two companies already share an advisor firm in Allen & Co, making for some very direct communications—and easy access to nearly-insider views of both companies. And some of the intangibles sure match up:

Yahoo wants a new leader and AOL CEO Tim Armstrong is a proven talent with an impeccable background at Google.

Armstrong would probably love a chance to lead a much larger Internet business than the floundering AOL, and Yahoo still qualifies for that description.

A reverse takeover would be easy enough to pull off as AOL's $1.2 billion enterprise value is easily covered by Yahoo's $2.5 billion in nearly debt-free cash. Moreover, corporate loans have rarely been as easy and inexpensive as they are right now in case Yahoo needed more cash to pump up the bid.

But both AOL and Yahoo are limping badly in their respective content and portal pursuits. Could two wrongs make a right? Would Yahoo find any value in AOL or vice versa?

Money matters

Perhaps the most important question for Yahoo is, will AOL help us make money today? To any potential buyer's relief, AOL happens to be profitable. Over the last four reported quarters, the company pulled in $2.2 billion in total sales, $230 million of net income, and $280 million in free cash flows. That's actually a pretty efficient business.

While nowhere near the 20 percent to 30 percent cash flow margins of cash machines Google and Apple, AOL's cash flow creation holds its own against Yahoo itself. Increase incoming sales and you'll get more cash. At a $3 billion buyout price—to account for that all-important buyout premium—AOL would earn its keep in about a decade. Less, if the business combination creates synergies to increase the cash streams even further.

Of course, we're assuming that AOL wouldn't be able to grow sales or profits on its own, nor shrink it. Unfortunately, AOL is having trouble keeping people interested in what it has to offer.

In 2006, AOL collected nearly $7.8 billion of total revenue, all under the wing of Time Warner. Since then, sales have dwindled by at least 20 percent every year despite increasing traffic: in 2006, Nielsen//NetRatings ranked AOL as the fifth-largest eyeball magnet in the world with 75.3 million unique visitors per month but the latest Nielsen report sinks AOL to number 10 with 100.6 million monthly users.

AOL is trying pretty darned hard to become a leading content publisher, spending hundreds of millions of dollars on big-name media centers like Huffington Post, Engadget, Joystiq, and TechCrunch. Yet the average time spent on AOL sites is just over two hours a month, ahead of Yahoo, but behind Google and Microsoft, among others. The new leader in sticky pages is Facebook, which has stolen AOL's old six-hour mark.

Sticky pages mean more advertising revenue, and AOL just can't keep us interested. And Yahoo doesn't have a solution to that problem, because its monthly engagement time has also dwindled from 3:28 in 2006 to just 1:43 today.

The mirage and the real world

So a merged Yahoo plus AOL would need to reverse the biggest thing the two have in common, which is a slippery hold on formerly very loyal site visitors. In theory, they might stand a chance if Yahoo's portal reach can pair up with exclusive AOL-generated content. Front-page promotion on Yahoo is a very big deal (when Ars content was featured on the front page of yahoo.com, we were on the receiving end of an amazing amount of traffic), and the company could put HuffPo or Joystiq content in front of millions of readers who never heard of either site before. For now, most of that prime real estate goes to The Associated Press, which hardly has any trouble finding distribution channels anyway.

Exclusive, high-quality content provided by AOL plus the biggest shotgun in the media distribution business should equal renewed growth for the two-headed beast. Going back to the old assumptions well, we're obviously banking on Tim Armstrong knowing exactly what to do and having the full support of Yahoo's much-maligned board of directors.

It's a big, bold, beautiful dream and it might be fun to see it happen. It's hard to look away from a train wreck in progress. But the world of online portals is becoming increasingly peronalized thanks to the social networking craze, so Armstrong would need to figure out how to steal both user attention and prime-time advertising deals back from Facebook, Twitter, Groupon, and their ilk. Big traffic numbers ruled the world once, but now you have to make every reader feel special. Our own special sauce here at Ars lies in our storied community, where sprawling discussion forums give you, dear reader, a direct line of communication with us here in the Orbiting HQ. Good luck making a personal connection with Yahoo's or AOL's creative staff.

So trying to fix Yahoo and AOL by bolting them together is a lot like fixing two totaled Chevys by welding them together. The unwieldy new beast might run for a while, but it turns heads only because of the novelty value. That will fade fast, and then you're back to trying to pick up girls in a metal monster sagging under its own weight.

What Yahoo needs is a buyout bid from Facebook. As for AOL, I can't think of a savior. In two or three years, the company will join MySpace on the great Cyberspace scrap heap in the sky.

Practically speaking, it's unlikely to halt the fade of either brand, but it makes so much sense from a comedy standpoint I can barely stand it: Two milquetoast-y, has-been, top-heavy, slow-moving companies that have pulled off the seemingly impossible: To be internet pioneers, then quickly overwhelmed and baffled by same. It's fucking fascinating.

If I worked for either company, I'd be sad. But I don't, so I think I'll just laugh and shake my head.

Aww, to tell the truth I really don't want AOL to die. I have been using the same email account on AOL for years. Wow, I registered a lot of different accounts and services from that single email address. Don't really need it now as much thanks to Disqus (it's a pain to sign up for a website just to post a comment... heard that Ars?) but I would miss that email account if I lose it.

The thought of this merger reminds me of the movie Robin and Marian where Sean Connery plays a aged, worn-out Robin Hood with a nearly unrecognizable Audrey Hepburn as Marian turned abbess. We love what the characters used to be, but what they've become is disappointing.

Well Aol still has content in Engadget, TechCrunch , Joystiq and The Huffington Post. I am quite sure there are plenty of companies that would aquire Aol for them. Yahoo just have web development tools, BOSS and YUI and not much else.

What I don't understand is how AOL is actually turning a profit. That's fascinating to me. It can't be from subscriptions to their service. Have they just really reduced their expenses? Does anyone know?

After the merger with Time Warner some ten years ago, the conglomerate lost more than 50 billion in one quarter. Ted Turner himself referred to it as a disaster of epic proportions, saying that he'd rather get back with one of his ex-wives than go through that again. Yep, this seems like a bad idea for Yahoo. Not that there are any good ideas for them at this point...

I dream that the resulting powerhouse Yahoo!+AOL could then purchase the remaining MySpace assets and then Microsoft could acquire the whole dog-pile en masse. I think this could be a huge win for consumers everywhere.

Maybe it would be just as well for them to join and sing, "Shall we gather at the river..."

Either way, expect to see them evaluated on Antiques Road Show, then placed upon a shelf next to a rare GI Joe nurse doll. Or carried into a wondering Chumlee in Pawn Stars. (I don't think American Restoration would do them much good.)

It's a weird coincidence but I was actually telling a friend of mine that aol and yahoo need each other right now. Everyone would hate on a merger because its fun to mock yahoo and aol, but this would actually be a good move.

"The code of tribal wisdom says that when you discover you are riding a dead horse, the best strategy is to dismount.

In law firms, we often try other strategies with dead horses, including the following: buying a stronger whip; changing riders; saying things like 'this is the way we have always ridden this horse'; appointing a committee to study the horse; arranging to visit other firms to see how they ride dead horses; increasing the standards to ride dead horses; declaring that the horse is better, faster, and cheaper dead; and finally, harnessing several dead horses together for increased speed."

-- Judge Thomas Penfield Jackson, 16 February 1999, in the courtroom after lunch on the second day of testimony from Microsoft's Brad Chase.

Anders is ultimately right. There is no value left and they will both die.

Let me apprise the market in a different way than usual. Yahoo's and AOL's place in the universe of specialized content is done. They have some blogs and some gaming communities, and they are nice, but they are a tiny business. The reason isn't because they are old brands (many of you don't realize you're on AOL's blogs at times because they hide the AOL brand).

It's easy to miss this, but Twitter, Google and Facebook have a HUGE strength that the others lack: MOBILE MONETIZATION. Twitter can cater to celebrity and corporate PR and their service usage skyrockets with mobile. Facebook usage goes up with mobile use, and they serve ads and microtransactions in their games. Google can serve ads in mobile location based searches.

MSN, AOL and Yahoo are basically blog/news/email stories in comparison and they're just not as strong, ESPECIALLY in mobile. Their messengers stuff, the old geocities and old AOL communities, they're all basically dead and the users moved onto facebook and twitter. They never got into enterprise in a big way like Amazon. They're not mobile facing in a compelling way, and so there's little opportunity there. Possibly Flickr could contribute somehow, but I think they're shut out by competing services with better mobile connections.

They can increase their value by consolidating ad network scale, but it won't be enough to compete in our mobile world. They'll ultimately need a partner in the new world, either web or hardware. So, Twitter + Flickr, or AOL+tablet, or Yahoo Games + a console. Yahoo+Nintendo makes sense as the best pure fit on both sides, but it would never happen culturally. Maybe Yahoo+Twitter if they want to be a general purpose portal, and that's a dicey proposition. Maybe Disney would want Yahoo to kill the sports games and blogs and make more on ESPN.

AOL just doesn't move the needle, no matter how great everyone thinks Armstrong is. Yes, there's quite a degree of difficulty with AOL, but he hasn't shown anything more than, say, Ballmer, as in 'buy the best competition you can afford and integrate it'.

Front-page promotion on Yahoo is a very big deal (when Ars content was featured on the front page of yahoo.com, we were on the receiving end of an amazing amount of traffic

That's actually how I found the site, and I don't think there has been a day I haven't read ars since. If there has been, there certainly hasn't been two days in a row where I haven't.

That said, I finally got fed up with Yahoo's decisions to make their site as annoying to operate as possible. I use a laptop and want to use the pgup and pgdn buttons, though google also suffers from this problem.

I also really hate Yahoo's emphasis on promoting completely uninteresting and mind numbing content about what could generously be described as pop culture. Yahoo was my home page for years, but it was recently changed to reuters and I can't see myself going back.

I think the article is both right and wrong. There's not much value left in either company (some in Yahoo), and I can't think of a way off the top of my head for the combination to do any better.

But, I think their future is ordained if they keep following the path they are on; and their odds against the competition are better standing together, rather than alone. So a merger would be a good move for them. I don't think it will help, except to buy them a couple of years, but I'd like to be wrong about that. Let's hope AOL stockholders see some vision, and don't get too greedy; saddling the new company with too much debt.

This would only have a chance if they changed brand after the merger. Both brands represent the old web in the minds of the consumer, and have done little to make their respective brands seem relevant and innovative. That psychological hurdle is insurmountable. They need to take a cue from Microsoft who realized the Windows Live brand had failed and instead came up with something new through Bing.

If the two companies merge they need to have something new and innovative to unveil with some new branding, and should preferably also change the name of the merged company. AOL Yahoo! will do nothing to excite interest, they need to completely arise from their own ashes.